Latin America Economic Forecast

Economic Snapshot for Latin America

November 11, 2015

Latin American economy nearing contraction

Latin America’s economic activity continues to show signs of weakness and, although major currencies in the region have demonstrated some stability in the past weeks due to central banks actively intervening in the markets, high volatility persists. According to an estimate elaborated by FocusEconomics, Latin America’s GDP decelerated from a 0.6% year-on-year increase in Q1 to a paltry 0.1% expansion in Q2. More recent data suggest that the region’s economy contracted 0.3% in Q3.

The deterioration seen at the beginning of the second half reflects broad-based weakness across the region and worsening economic conditions, particularly in Brazil and Venezuela. In Brazil, turbulence is on the rise and has been influenced mainly by domestic factors. The Brazilian government recently announced new fiscal measures that required congressional approval. However, as the government of President Dilma Rousseff continues facing strong opposition and its approval ratings are in freefall, the fiscal measures were watered down in Congress. As the tough recession is denting tax revenues and the government continues to struggle to organize the public accounts, the country’s fiscal adjustment remains uncertain. Meanwhile, in Venezuela, the economic situation remains critical and political instability is likely to be high in the period surrounding the 6 December legislative election.

Latin America will contract this year; outlook for 2016 continues to disappoint

The outlook for Latin America has changed dramatically in the past months owing mainly to worsening economic dynamics in Brazil and Venezuela. The group of economists that participated in this month’s LatinFocus Consensus Forecast cut the region’s GDP growth forecast by 0.1 percentage points over the previous month and now see the economy contracting 0.1% in 2015. If the forecast is confirmed, it will represent the first contraction in economic activity since the global financial crisis hit the region in 2009. Moreover, Latin America’s economic outlook for 2016 continues to disappoint. Analysts surveyed by FocusEconomics also cut the region’s 2016 GDP growth forecast by 0.1 percentage points from last month’s projection and now expect the economy to expand 1.0%.

Looking at the countries in the region, economists slashed their growth forecasts for many of the economies surveyed this month. However, panelists left the projections unchanged for Argentina, Colombia, Mexico and Peru.

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BRAZIL | Recovery remains elusive in H2, Congress waters down austerity measures

Latin America’s largest economy continues to show signs of being stuck in a prolonged recession. After recording the sharpest fall in over six years in the second quarter, recent data suggest that recovery remains elusive in the second half of the year. Economic activity contracted in August and the manufacturing PMI fell to a six-year-low in October. In addition, confidence is languishing at low levels and consumer confidence plummeted to a new record low in October. The economy is unlikely to see a significant rebound without much-needed economic reforms, however political wrangling is stalling the government’s attempts at reform. President Dilma Rousseff’s approval ratings have fallen to all-time lows and she is facing a large amount of opposition in Congress, which has watered down a number of austerity measures. As a result of the large challenges to fiscal consolidation, poor growth prospects and the government’s rising debt burden, Fitch Ratings downgraded Brazil to BBB- from BBB, one notch above junk bond status in October.

Brazil’s economy is expected to record the largest contraction in over a decade in 2015, plagued by depressed private consumption and low prices for commodities. FocusEconomics panelists see the economy contracting 2.9% in 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, the panel participating in this month’s LatinFocus report sees the economy remaining in a contraction and falling 1.1%. 

MEXICO | Recent data show acceleration in Q3 and further improvement at the outset of Q4

The National Statistics Institute (INEGI) released a first GDP estimate for Q3, which puts Mexico in line with other OECD countries. The preliminary data showed that the economy accelerated from a 2.2% increase in Q2 to a 2.4% expansion in Q3. Moreover, recent data point to healthy economic dynamics at the beginning of Q4. Operating conditions in the manufacturing sector improved in October and, due to low unemployment, low inflation and better economic prospects, consumer confidence rose in the same month. Vulnerabilities came from the external side of the economy in September, including a further deterioration in the trade deficit due to continued weakness in oil exports as well as a slowdown in remittances from Mexican workers abroad.

Mexico’s economic outlook hinges on the recovery of the U.S. economy, developments in the global oil markets and the potential effects of China’s slowing economy, although a deceleration of the Asian giant should only result in a minor impact on the Mexican economy. Analysts polled by FocusEconomics expect GDP to increase 2.3% this year, which is unchanged from last month’s forecast. For 2016, the panel sees the economy expanding 2.9%. 

ARGENTINA | Presidential election heads to a runoff

In Q2, Argentina’s economy gained some strength on the back of a surge in government spending, but latest data show that the economy likely decelerated in Q3. Economic activity lost steam in August and industrial production barely increased in September. The country held presidential elections on 25 October, but no candidate emerged triumphant as no one was able to surpass the 45% vote threshold. As a result, a runoff between Daniel Scioli—the candidate from the ruling left-wing Front for Victory party—and Mauricio Macri—the representative of the conservative Let’s Change coalition—will be held on 22 November. Despite their different proposed approaches, the two candidates agree that gaining access to international capital markets is key to improving the country’s growth trajectory and fiscal stance. Expectations that the incoming government will devalue the currency soon are weighing on foreign reserves as the Central Bank tries to counteract excess demand for the U.S. dollar.

Macroeconomic dynamics in the medium term will largely depend on the outcome of the second round of voting. Hopes that a new government will implement more market-friendly policies and a gradual recovery in commodity prices should support the economy in the long run. However, contracting exports and weak investment due to political uncertainty will weigh on growth this year. The panelists we surveyed for this month’s LatinFocus Consensus Forecast expect GDP to expand 1.1% in 2015 and 0.9% in 2016. 

VENEZUELA | Cash-strapped Venezuela likely to face political instability ahead of elections 

There is ample evidence that the Venezuelan economy remains in freefall and is strapped for cash as it heads toward the legislative elections scheduled for 6 December. Venezuela has resorted to sell its gold reserves in an effort to raise cash to pay USD 3.5 billion in bond payments and to fund import purchases as well. Latest available data show that the value of the Central Bank’s bullion holdings fell 28% in May compared to the previous year and international reserves are nearing a 12-year low of USD 15.2 billion. Furthermore, the IMF recently announced that Venezuela exchanged USD 460 million in October from its Special Drawing Rights (SDR) for hard currency for the third time this year. The Venezuelan government owes around USD 15.8 billion in debt payments that are due between November and the end of 2016. The dwindling of reserves raises questions as to how country will be able to meet its debt obligations in the following years and continue financing its external imbalances.

Despite a possible change in Venezuela’s Legislative Assembly, the country’s growth prospects are grim. A shrinking economy, runaway inflation and low oil prices are likely to propel the largest contraction in over a decade this year. Economic analysts who took part in this month’s LatinFocus Consensus Forecast panel see a 7.4% contraction in GDP for 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, the panel sees GDP falling 4.1%. 

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INFLATION | Inflation continues upward trend

Data showed that in October regional inflation continued the upward trend that has been observed since December of last year. According to an inflation estimate elaborated by FocusEconomics, inflation in Latin America stood at 17.9% in October, which was up from the 17.1% registered in September. As suggested by the FocusEconomics’ estimate, inflation in the region remains high and, as the inflation outlook in many Latin American economies continues to deteriorate, central banks across the continent are taking policy action, with some increasing interest rates. However, amid weak growth these central banks are communicating that much higher interest rates are unlikely in the near term.

The panel of analysts that participated in this month’s LatinFocus Consensus Forecast raised the region’s 2015 inflation forecast from last month’s 17.6% to 18.1%. This month’s result reflected higher inflation projections for six economies. Moreover, Venezuela continues to be a source of concern as inflation is now expected to reach the 180% mark at the end of 2015. For 2016, panelists expect inflation in the region to fall to 15.8%.


Written by: Ricardo Aceves, Senior Economist

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